Voting Trusts
A more extreme depature from the norm of attendance and voting is the voting trust. Corporate governance The hallmark of the voting trust is the complete separation of ownership from the other aspects of ownership. Although the shareholders may discuss matters, the trustee has no obligation to listen to them. A complete severance of voting and ownership has occured, with all voting rights lodged in the trustee's hands. The shareholders participating in such as trust actually endorse their share certificates over to the trustee, who may give back to the shareholders a "certificate of beneficial interest." Voting trust are often used to maintain control, or to insure stability in management of corporate affairs, often at the insistence of creditors or venture capitalists. In a shareholder pooling agreement, the stated consequences follows only if the parties fail to agree. In the first instance, the shareholders are able to meet, discuss the issues, and decide upon a course of conduct. Thus, in a pooling agreement, there is only partial separation between voting and other aspects of ownership. THe separation occurs only if hte aprties to the agreement cannot agree. Cases challenge voting trusts or arrangements contened to be equivalent to voting trusts as "illegal voting trusts." An illegal voting trust is simply one that fials to compy with the statutory requirements that *the voting turst be of record at the corporation's principal offices (not secret) and *be limited in duratino, often ten years. If the arrangment is unconventional, and is not of record or limited in duration, the issue presented is whether the device or arrangement is a voting trust. Several famous cases deal with that issue. Lehrman v. Cohen, hwoever, reasted upon an earlier, and famous, Delaware case, Abercrombie v. Davis. Abercormbie applied the test of earlier Delaware cases, "that one essential feature that characterizes a voting trust is the separation of the voting rights of stock from the other attributes of ownership." The court found a voting trust in an arrangement in which six owners holding 54 percent of the American Independent Oil Co, transferred stock certificates and voting power using irrevocable proxies to eight designated agents, agreeing that the vote of seven of the eight agents would bind the group. The shareholder agreement here, combined iwth the irrevocalble proxies, resulting in a separation of the votings rights form the shares. The previous sentence describes the physical arrangement, sometimes legally required, that accompanies formation of the voting trsut. The pariticpating shareholders actually endorce and delvier share certificates to the trustee who may then return to shareholders "certificates of beneficial interest." The certificate represents return to the sharholder of all rights associated with shareholding except the right to vote the shres on all or some issues which come before the shareholders. the latter right, of course, remains with the trustee for the period of the trust. Grafted onto, or impliedly incorporated into, the trust instrument - as well as in other voting devices, such as irrevocable proxies or pooling agreements - is the proper purpose doctrine. Thus, for example, a trust that is found to have fraud, illegality, or repaying a benefit to the detriment or exclusion of minority shareholders as its purpose would violate the proper purpsoe doctrine even though the trustee is merely doing the participants' bidding and is not, therefore, in breach of her fiducairy duty of loyalty. A trust formed to elect directors who will disregard the environemntal laws or who will permit the looting of the coropraiton by the majroity shareholder woudl run also afould of the proper purpsoe doctrine. Also, important to remmenber is that a voting trust is a trust. The trustee owes fiduciary duties of care and loyalty to the participating shareholders. What exactly that might mean in the context is the subejct of warehime v. warehime,. John Warehime, the CEO of a successful food company, Hanover Foods (HFC). was alsot hte trustee of a voting trsut. He proposed issuance of a new class C of preferred stock which would ahve superstock rights (35 votes per share to HFC's 401(k) plan, which was administreed by certain HFC directors Wharehime had elected. THe superstock voting rights would spring into being only upon a prolonged dispute among the warehime siblings and would exist for 5 yeras after the issuance. The compain was that hte srpinging voting rights woudl give the direcotrs elected by JOhn Warehime 5 extra years contorl, byoned the voting turst's 10 yera term, over the compnay, including appointment to the CEO position. John Warehime and the directors maintinead hthat the arrangment was necessary to give the company added stbaility, faciliatating a major round of financing, whihc would rebound ot the vtoing turst beenficiaries in the long run. In contrast, the pariticpating shraehodlers mantained the arrangment to be an entrechment attempt to benefit John Warehim who also was a trustee. The Supreme Court of Pennsylvania applied a subjective standard of good fiath (some would say warm heart) to one who was a voting trustee. It buttresssed its finding with a provision of the voting turst agreemnt consittuion, in its opinion, "a definition of the fiduciary obilgation": "the turstee will use his best judgment in voting the stock held by him, and assumes no responsibility for hte cosneuqnece of any vote cast or consent given by him, in good faith." "If the parties had intended to limit the trsutee's authroity ... they woudl have incldued a provision ..." said Chief Justice Cappy. The dissent poitned out tthat such as trust provision constitues a defense to duty of care violations bny a trustee. It has no applicability to stiutations of divided loyalties. "the duty of absolute loyalty to the beneficiaries must pervade any and all actions a trustee undertakes." The principle admits of "no leeway." good faith is not a defense against a claim of disloyalty." The trustee must at all tiems serve the beneficiaries' best interests. An old saying is that a trustee may not, under any cirucmstances, purchase at her own sale. By contrast, a coroprate director may deal iwth teh corporation on whose board she sits if she makes full disclosure and obtains disinterested deicisonmakers' approval or, in any case, if she can demonstrate that hte trasnaction's terms are fair. In Warehime, the court seemed to apply a director standard to one who was serving as a trustee. Nonetheless, the case poitns to a resurgence in the use of voting trusts. Angels, venture capitalists, adn other mid stage financeiers today often insist that high tech and other corporate entrepuresenurs put hteir shares in trsut for a period of years in order to faciliate stability in governance until such time as teh cororpation becomes able to do an initial public offering.